CHAPTER 8

Uses of Coding in AIS

Concisely represent large amounts of complexinformation that would otherwise beunmanageable

Provide a means of accountability over thecompleteness of the transactions processed

Identify unique transactions and accountswithin a file

Support the audit function by providing aneffective audit trail

Sequential Codes represent items in sequential order. It is used to prenumber source documents, track
each transaction processed, identify any out-of-sequence documents.

Disadvantages:

arbitrary information

hard to make changes and insertions

Block Codes represent whole classes by assigning each class aspecific range within the coding scheme. It
is used for chart of accounts and is the basis of the general ledger. It allows for the easy insertion of new
codes withina block. There would be no need to reorganize the coding structure.

Disadvantage:

arbitrary information

Group Codes represent complex items or events involving twoor more pieces of data using fields with
specificmeaning.

Disadvantages:

– arbitrary information

– overused

Alphabetic Codes is used for many of the same purposes asnumeric codes. It can be assigned
sequentially or used in blockand group coding techniques and may be used to represent large numbers
ofitems. It can represent up to 26 variations per field

Disadvantage:

arbitrary information

Mnemonic Codes are alphabetic characters used asabbreviations, acronyms, and other types
ofcombinations. They do not require users to memorize themeaning since the code itself is
informativeand not arbitrary.

Disadvantages:

limited usability and availability

IS Functions of GLS

General ledger systems should:

collect transaction data promptly and accurately

classify/code data and accounts

validate collected transactions/ maintain accountingcontrols (e.g., equal debits and credits)

process transaction data

post transactions to proper accounts

 update general ledger accounts and transaction files

record adjustments to accounts

store transaction data

generate timely financial reports

GLS Database

 General ledger master file - principal FRS file based on chart of accounts
 General ledger history file - used for comparative financial support
 Journal voucher file - all journal vouchers of the current period
 Journal voucher history file - journal vouchers of past periods for audit trail
 Responsibility center file - financial data by responsibility centers for MRS
 Budget master file - budget data by responsibility centers for MRS

GLS Reports

General ledger analysis includes:

1. listing of transactions
2. allocation of expenses to cost centers
3. comparison of account balances from prior periods
4. trial balances

Financial statements reports:

1. balance sheet
2. income statement
3. statement of cash flows

Managerial reports:
 1. analysis of sales
2. analysis of cash
3. analysis of receivables
4. Chart of accounts: coded listing of accounts

Potential Risks in the GL/FRS

Improperly prepared journal entries

Unposted journal entries

Debits not equal to credits

Subsidiary not equal to G/L control accounts

Inappropriate access to the G/L

Poor audit trail

Lost or damaged data

Account balances that are wrong because ofunauthorized or incorrect journal vouchers

GL/FRS Control Issues

Transaction authorization – journalvouchers must be authorized by amanager at the source dept

Segregation of duties – G/L clerksshould nothave recordkeeping responsibility for specialjournals or

subsidiary ledgers,prepare journal vouchers and have custody of physical assets.

Access controls - unauthorized access to G/L can result inerrors, fraud, and misrepresentations
infinancial statements.Sarbanes-Oxley requires controls that limitdatabase access to only authorized
individuals.

Accounting records - trace sourcedocuments from inception to financialstatements and vice versa.

Independent verification

G/L dept. reconciles journal vouchers andsummaries. The two important operational reports used are
the journal voucher listing where details of eachjournal voucher posted to the G/L and the general
ledger change report where the effectsof journal voucher postings on G/Laccounts.

GL/FRS Using Database Technology

Advantages:

immediate update and reconciliation

timely, if not real-time, information

Removes separation of transaction authorization andprocessing

Detailed journal voucher listing and account activityreports are a compensating control

Centralized access to accounting records

Passwords and authorization tables as controls

Management Reporting Systems produce financial and nonfinancialinformation needed by

management to“plan, evaluate, control”. It is usually seen as discretionary reporting. MRS provide a
formal means formonitoring the internal controls.

The Factors That Influence MRS Designare:

A. Management principles
B. Management function, level, and decision type
C. Problem structure
D. Types of management reports
E. Responsibility accounting
F. Behavioral considerations

1. Management principles – includes the formalization of tasks, structures the firm around the
tasksperformed rather than aroundindividuals’ unique skills, allows specification of the
informationneeded to support the tasks.

 Responsibility And Authority - is delegated by managers to subordinates and define the vertical
reporting channelsthrough which information flows.

 responsibility - obligation to achievedesired results

 authority - power to make decisionswithin the limits of that responsibility
 Span of control refers to the number of subordinates directly under the manager’scontrol. It
displays detailed reports for managers with narrow spans of control and summarized
information for managers with broad spans ofcontrol.
 Management by exception:Managers should limit their attentionto potential problem
areas.Reports should focus on changes inkey factors that are asymptomatic ofpotential
problems.

2. Management function, level, and decision type includes:

Strategic planning decisions which involves firm’s goals and objectives, scope of business activities,
organizational structure, management philosophy, long-term, with broad scope and impact, non-
 recurring , with high degree of uncertainty, need highly summarized information, and require
external & internal information sources.

Tactical planning decisions which involves subordinate to strategic decisions, short termspecific
objectives, recur often, fairly certain outcomes, and have limited impact on the firm.

Management control decisions using resources as productively as possible in allfunctional areas,

evaluating the performance of subordinates againststandards

Measuring performance is difficult because sounddecisions with long-term benefits may

negativelyimpact the short- term bottom line.

Operational control decisions which deal with routine tasks, has narrower focus, dependent on
details, highly structured, and has short time frame.

Three basic elements or steps include: set attainable standards, evaluate performance, and take
corrective action.

3. Problem structure reflects and affects how well decisionmakers understand and solve problems
The Elements of problem structure are data, procedures and objectives.

4. Types of management reports- reports must have valueor information content. They should
reduce the level of uncertainty associated witha problem facing the decision maker and
influence the behavior of the decision maker ina positive way.

REPORT ATTRIBUTES

1. Relevance – useful to decision making

2. Summarization – appropriate level of detail
3. Exception orientation – identify risks
4. Accuracy – free of material errors
5. Completeness – essential information
6. Timeliness – in time for decisions
7. Conciseness – understandable format

A relevantInformation has predictive value, is timely, and has a feedback value.

A reliableInformation is verifiable, neutral, and is faithfully represented.

TYPES OF MANAGEMENT REPORTS

A. Programmed reports:scheduled reports – produced at specifiedintervals, e.g., weekly

B. on-demand reports – triggered by events, e.g.,inventory levels drop to a certain level
 C. Ad hoc reports:designed and created “as needed” or when situations arise that require new
information.

5. Responsibility accountingImplies that every economic event thataffects the organization is the
responsibilityof and can be traced to an individualmanager and incorporates the fundamental
principlethat responsibility-area managers areaccountable for items that they control.

Setting Financial Goals:

Budgeting - Budgeting helps management achieve financial objectives by setting measurable goals for
each organizational segment.

Budget information flows downward and becomes increasingly detailed at each lower level.

The performance information flows upward as responsibility reports.

RESPONSIBILITY CENTERS

A. Cost center – responsible for keeping costswithin budgetary limits

B. Profit center – responsible for both costcontrol and revenue generation
C. Investment center – has general authority tomake a wide range of decisions affecting
costs,revenue, and investments in assets.

6. Behavioral considerations includes:

 Goal Congruence - MRS and compensation schemes help to appropriately assign

authority and responsibility. If compensation measures are not carefully designed,
managers may engage in actions not optimal for the organization.

 Information Overload - occurs when managers receive more information than they
can assimilate. It can cause managers to disregard formal information and rely on
informal— probably inferior—cues when making decisions.

 Performance measures – are appropriate performance measures which stimulate

behavior consistent with firm objectives. Managers consider all relevant aspects, not
just one

Example of inappropriate measures:

 price variance – can affect the quality of the itemspurchased

 quotas – can affect quality control, material usageefficiency, labor relations, plant
maintenance
 profit measures – can affect plant investment, employeetraining, inventory
reserve levels, customer satisfaction